New Buy to Let Portfolio Mortgage Rules - What Landlords Need to Consider
The landscape of the buy to let mortgage market has changed significantly within the last twelve months.
Over the past year new tax rules have been introduced and further lending regulations have been put in place by the Prudential Regulation Authority (the PRA).
These new changes have serious implications for buy to let landlords.
Tax rules 2017
From 2017, landlords can no longer deduct their entire expenses incurred as a result of their buy to let properties to calculate their profits at the end of the financial year. As a result, landlords’ tax bills will increase heavily at the end of the financial year.
According to the government, the new tax relief rules are to ensure that landlords with higher incomes no longer receive the most generous tax treatment.
The 2017 tax rules do not affect limited companies and therefore only limited companies’ profits will be subject to tax.
This has led to an increase of landlords looking to set up their own limited company to avoid the effect of the new tax rules. Those landlords who wish to set up their own limited company should understand the associated costs first; however, there is no time to lose in getting expert advice on how the new rules will impact you. Talking to a specialist property tax account is a sensible first step.
Property portfolio landlords
The PRA regulations impose tougher standards for property portfolio landlords.
A property portfolio landlord is defined by the PRA as a landlord with four or more properties. These properties do not just have to be residential dwellings, they can be:
- Student lets
- Houses of multiple occupation (HMO’s)
- Professional lets
- Multiple units under one freehold title
- Company lets
- Short leasehold properties
Lending criteria 2017
As a result of the PRA’s review of the buy to let market in 2015/2016, the regulations that govern how buy to let lenders consider applications have changed. According to the PRA, the new regulations are to minimise irresponsible lending and avoid another 2008 financial crisis.
These changes may have made it more difficult for landlords to source the finance they need for their buy to let portfolios.
In order to comply with the new portfolio landlord underwriting standards, lenders will focus on rental coverage ratio, landlords’ income and property portfolios.
If you are a landlord operating under a limited company, many high street buy to let lenders are not currently offering limited buy to let portfolio mortgages so your finance options are limited. However, the good news is that there are a number of specialist lenders who are in the portfolio market. A good finance broker should be able to help you with your requirements.
Rental coverage ratio
Prior to the regulation changes, landlords only required a rental coverage ratio of 125% to secure a buy to let mortgage. Under the new rules, landlords need a rental coverage ratio of at least 140% for standard buy to lets and higher for HMOs. The increase in rental coverage ratio is said to provide landlords a ‘safety net’ for any period of time when the property is without tenants.
It is important to note that landlords cannot simply just raise the rental coverage ratio on the application, as lenders will only accept rental coverage ratios based on a professional surveyor’s evaluation.
Income stress test
Traditionally, lenders have always focused on the landlord’s income during an application. However, following the changes in regulation, lenders will now scrutinise landlords’ income more than ever before. Lenders will introduce a stricter income stress test for buy to let mortgage applications. In order to satisfy the income stress test, landlords will have to demonstrate that they can afford the mortgage repayments in the event interest rates increase to 5.5%
Review of entire portfolio
Lenders will now require an in-depth review of the landlord’s property portfolio during the application process. Lenders will no longer provide a buy to let mortgage to a landlord if one or more of their buy to lets are not profitable.
Some lenders have even put a cap on the amount of properties that a landlord can finance with them, for example Santander have restricted the number of properties to just three.
The 2017 regulations provide that landlords can no longer spread equity over their portfolio to prop up properties that do not provide the rental ratio required.
Prior to the changes, the majority of landlords used to use their profitable buy to lets to cover any shortfalls on their properties that failed to provide a positive return. Under the previous regulations, buy to let landlords were able to find the balance between the outgoings of their properties and the profit generated from their buy to lets.
Example: Under the new regulations, if a landlord has five properties and four of them provide a healthy profit (of at least 145% of the monthly mortgage payment), but one of their properties do not then the lender may refuse to provide finance.
Effect on the buy to let market
The 2017 buy to let regulations may place a greater burden on the lenders in the buy to let market. Many lenders are struggling to implement the new rules for buy to let lending to their internal systems. As a result of all the extra work that lenders need to complete to comply with the new rules, the cost of borrowing may increase. This could mean that a number of lenders decide to exit the portfolio buy to let market.
If some lenders leave the buy to let market it would leave less choice for landlords when it comes to property finance.
Landlords need to ensure they are being placed with the right lender for their business. A good buy to let mortgage broker will be able to assess your portfolio and determine the right lender, which may not always be based on the cheapest rate available.
Even in the event that the majority of lenders remain in the buy to let mortgage market, the new regulations will draw out the application process, which may result in lengthy delays and some landlords losing out on properties.
The new changes may force portfolio landlords to become more innovative with their approach to funding their buy to let portfolios. Landlords have started to look to specialist buy to let lenders to provide the finance they need or even explore short term finance options to secure property, to ensure they don’t miss out on an opportunity, then arrange longer term finance later on.
Specialist buy to let lenders
Landlords who wish to avoid the arduous process of applying for buy to let mortgages with traditional lenders may want to explore the financial options available to them through private lenders.
Bridge to let loans
A Bridging loan is a type of fast, short term loan that can be used to resolve cash flow issues and 'bridge' the gap in funding until more permanent finance is in place.
Bridging loans may be an attractive option for landlords with four or more buy to let properties, as they can provide a substantial amount of finance within a small time frame.
A bridging loan can provide:
- Finance from £50K to £25M
- Term of finance from 1 to 36 months
- Development finance within 7 days is possible
- FCA Regulated and unregulated loans
- Funding for individuals, limited companies, sole traders and partnerships and trusts
- No upper age limit
- Finance for unmortgageable properties
Portfolio landlords may be drawn to bridging finance, as the majority of lenders are flexible in relation to interest. Bridging loan lenders usually offer the option to 'roll-up' interest to pay at the end of the term of finance.
Landlords with four or more properties could roll up the interest on a bridging loan to avoid monthly interest payments and focus their entire funding on their buy to let project.
Unlike traditional lenders, who are required to review a landlord's portfolio, consider their income and rental coverage ratio, bridging loan lenders simply require details of the landlord's exit plan. An exit plan is the strategy that the landlord will use to repay the loan in the agreed term of finance.
An example of an exit plan is where the landlord purchases a buy to let property and slowly gets it to the point where more permanent finance is in place. A broker would arrange a decision in principle to lend to ensure an exit is possible onto a buy to let mortgage. In this scenario, bridging finance would ensure the landlord did not lose the property to another buyer and then provide the term of finance to get their portfolio, income and rental coverage ratio up to standard to secure long term permanent finance.
How to get finance for buy to let property portfolios
As a specialist property finance broker, Clifton Private Finance can arrange the best financial solution for your set of circumstances. To investigate your finance options call our team on 0117 959 5094 or fill in our call back form.